Registered crowdfunding platform to conduct regulatory checks and basic due diligence of start-ups and investors; and Constitution of ‘screening committee’ by each platform comprising 10 persons with experience in capital markets, mentoring start-ups etc.

On June 23, 2015, SEBI made it easier for entrepreneur-driven new companies to list on stock exchange platforms with an easier listing, shareholding and disclosure norms.

Later in 2016, SEBI declared over twenty equity crowdfunding platforms as illegal.

Digital Equity Crowdfunding Illegal in India

The root cause of the restrictions imposed on equity crowdfunding can be traced to money laundering.An example of laundering under the label of crowdfunding is the Sahara case. These activities have led to monitoring crowdfunding that involves a huge amount of money or is equity based.

The investors tend to turn fraudulent involving the large sums raised. The campaign owners can be affected negatively. This is because there is no recourse for the backers.

For crowdfunding based on lending, authorization from RBI is required as it comes under its regulations. There is a need for documentation of formalities and disclosures related to utilization of funds and other relevant details.

In the SEBI norms, issuers can raise only up to Rs 10 crore by issuing equity shares.No single investor shall hold more than 25% stake in a company. The promoter(s) should have a minimum of 5% equity stake in the company for at least 3 years. There is this thin line in SEBI crowdfunding guidelines that would make equity crowdfunding illegal.

Since India is an emerging platform for online transactions, the digital market is susceptible to security threats while funding business models online. Another reason why SEBI has issued regulations in the name of public safety.